Colgate-Palmolive (NYSE: CL) recently reported its Q3 results, with revenues and earnings beating the street estimates. However, we believe that CL stock has little room for growth, as discussed below. The company reported revenue of $4.9 billion, reflecting 10.5% growth from the prior year period and above the $4.8 billion street estimate. Its adjusted earnings of $0.86 per share were up 16% y-o-y and above the consensus estimate of $0.80 per share. In this note, we discuss Colgate-Palmolive’s stock performance, key takeaways from its recent results, and valuation.
CL stock has seen a decline of 10% from levels of $85 in early January 2021 to around $75 now, vs. an increase of about 10% for the S&P 500 over this roughly three-year period. CL has had a poor run, with the stock losing value in each of the last three years. Returns for the stock were 0% in 2021, -8% in 2022, and -6% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 9% in 2023 (YTD) – indicating that CL underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT.
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In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CL face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, we believe CL stock has little room for growth. We estimate Colgate-Palmolive’s Valuation to be $81 per share, reflecting only a 10% upside from its current levels of $73. Our forecast is based on a 25x P/E multiple for CL and expected earnings of $3.21 on a per-share and adjusted basis for the full year 2023. This compares with the last three-year average P/E multiple of 26x. The company raised its earnings outlook to rise in high single-digits vs. its prior view of high end of mid-single-digit growth.
Colgate-Palmolive’s revenue of $4.9 billion in Q3 2023 was up 10% y-o-y, led by a 21% growth in Pet Nutrition and an 8% rise in Oral, Personal, and Home Care segment sales. Pet Nutrition sales growth was driven by a 12% rise in pricing and a 9% growth in volume. On the other hand, Oral, Personal, and Home Care segment sales saw its volume decline by 1%, but an 8.5% pricing gain resulted in segment sales growth of 8%. The company also saw its operating margin expand by 30 bps to 21%. Higher revenues and margin expansion resulted in adjusted earnings per share growth of 16% to $0.86 in Q3’23, compared to $0.74 in the prior-year quarter.
|S&P 500 Return||-4%||7%||84%|
|Trefis Reinforced Value Portfolio||-5%||17%||500%|
 Month-to-date and year-to-date as of 10/31/2023
 Cumulative total returns since the end of 2016